Jeffrey Gundlach on Channel 11: So Much Said, So Little Heard

I thought it was a disaster. I think Steve Leeman put it best. He said, "I've never listened to so much and heard so little." The perfect word for it that I came up with on CNBC with Scott Wapner right after the press conference was the guy is glib, and glib's a funny word because it's like 50% positive and 50% negative. It's like easy, almost overconfidence but a certain amount of insincerity. I thought it was interesting. Steve Leeman asked the first question in the press conference and he said, you said that you're looking more to signs from the market, the message of the market. And he said, so what do you think the market's telling you right now? And Wunsch said, what the market's telling us is what the market is. That wasn't exactly the words but that was absolutely the meaning, which is just incredible, just the lack of information. And as I was talking with Scott Wapner, I didn't have this idea, but at the beginning of the segment, as the segment went on, I started to realize they're going to have to hike in September because he can't keep being so emphatic and just kind of almost arrogant about getting to 2% and just do nothing.

And so for him to skip September and give something along the same messaging as he gave yesterday, I think people wouldn't believe him. They would just say it's time to start acting. And you can see that the action in the market was remarkable. We've been on a flattening trend in the 2s30s. It got as wide as plus 130 from twos to 30s and then it got down into the 70s or so. And this morning it was at 100 and I think it's settled in at about 98. So the long end of the market just hates the fact that he's not tightening, and stocks are also doing pretty poorly.

We've been advocating the same thing for quite some time, and with this curve having gone 2s30s from negative 108 to positive now 100, I mean, it's obviously you don't want to be in the long end. So there's two areas to avoid. That leaves you with what's left. I would avoid long bonds of all types. An ancillary problem for the 30-year Treasury is there's 20-year and 30-year AI bonds coming, like SpaceX's thing. And what's really telling is the rating agencies have been coerced, I think, into giving them inflated ratings. Like SpaceX, I think it's trading like a single-B. And that's true of a lot of these other things. So you don't want the lower parts of credit. I wouldn't have any exposure to these mania markets. And what we've been focusing on is the higher investment-grade market or maybe double-B would be acceptable in the corporate bond market. But still the area that is really most attractive is where you're avoiding the long end. So you want things that are the 2-year, the 3-year, the 5-year, which doesn't really lend itself to corporate bonds as much because they tend to be issued with 10-year or at least 7-year maturities. But in the structured products market like asset-backed securities, commercial mortgage-backed securities, legacy RMBS, some higher end of the CLO spectrum, that's exactly where you are on the curve. So you end up with a short, intermediate to maybe 5-year type of portfolio, but you have very little risk in these products. I think RMBS, certainly the legacy stuff or even the ones issued five years ago, it's probably the risk-free asset. I think they're safer than Treasuries. Home prices have gone up so much you have to be dumb as a stone to default. It's just idiotic. I mean, you would just sell your house and book the gain. You can live for a few years off the gain. So there's no risk there.

Basically spread products have been very contained in terms of their spread movement for most of this year. I'd actually say for most of the past year and a half. So they're not wildly attractive, but they're very low risk. And with the Fed likely to tighten, I think people are starting to realize that's going to have to happen. There's nothing wrong with being floating rate. So the CLO market and the triple-B AAA category, the double-A category looks pretty attractive. You have a spread there over a benchmark rate, SOFR, which is very likely to go higher. So you want to avoid duration and you want to avoid lower tiers of credit. And it just seems like some bad things have started to happen. We've got these new bonds being issued from SpaceX and others and they just instantly, within days, trade down multiple points, basically rejecting the ratings by the rating agencies. And of course today the news comes out that we've had a hedge fund blow up.

You know, which that usually happens amidst something trending in the wrong direction. I mean, it's really interesting that every time I get a new Fed chairperson, it's not very long after they have their first meeting where something blows up. And here's Wunsch. He's had 43 days on the job and he's already had fun blowing up on them. Now, who knows if that's one-off. Oftentimes it can be one-off, but it's a sign of leverage. It's a sign of overbelief in the mania and all of that thing. So I really believe that investors should be in a very low-risk position relative to normal. I also think that non-US investing seems to be more attractive to me. It's already started to outperform since really the end of 2024. You've had Europe outperforming on just an index price basis. The S&P 500, emerging markets have outperformed by even more. And so I think that's a trend that's likely to continue. I've stated for quite a while now since the dollar topped out that the dollar's path of least resistance is down. Now, that has not happened since the end of February because once you have a war, people tend to come to the United States. So the dollar managed to rally from 98 to about 101 and a half, which there's a lot of people talking about how strong this dollar is, but that's a very trivial move.

And so I also think that when we were at the 98 level on the dollar, there was a tremendous short position in the dollar and that's completely reversed. There's actually one of the largest long positions in the market right now on the dollar. And so I think the dollar is likely to head lower, particularly if there's ever any resolution to this war. But you know, wars always last far longer than anybody thinks. Afghanistan went on for, I don't know how many years. It was double-digit years for sure. Vietnam was 17 years and here we are. We're supposed to be in and out of there with one bombing strike and now it's over past five months. It was five months two days ago. And as I was saying in our strategy meetings when we started, I said every war in my lifetime has started with the phrase the troops will be home by Christmas. And I don't know what the resolution to this is, but the oil price is starting to get kind of important again. Was down at 56 before the war, went up to, I don't know what the high was, 120 for a moment, and then it settled back down to 70. Even got below 70, and now I think we're at 85 and a half, heading to 90. And it wouldn't surprise me with the stockpiles so low. The US strategic reserve has been drawn down a lot since the war started, by like hundreds of millions of barrels, and I just think that the need to replace that is going to put a floor underneath the oil price and we're not alone in having drawn down reserves and stockpiles. So I think a lot of people were talking about oil at $30 a barrel. I just don't think that's possible.

I think if oil got down to the 60s and certainly below 60, I think there would be a big wave of buying. Very large bid to replenish these stockpiles. So the inflation problem, you know, continues to be kind of a thorn in the side of the Fed and the thorn in the side of the markets because with oil where it is right now and commodities broadly, it's very unlikely that the inflation rate is going to settle down to a two-handle. I mean, we might get one in the second quarter, the April report, which is the March number reported in April. That's going to have a huge decline because the base effects, the one that's rolling off is really big. So you might get a two-handle at that point in time, but that's a ways away. It's fraught with peril to be predicting what the inflation rate will be, you know, six months from now or even more than six months from now. So one thing that's interesting, we've introduced TIPS into some of our strategies, some of the more core fixed-income types of strategies, and the TIPS market has kind of stalled out recently, and the break-evens that are in the TIPS market really seem too low. I mean, they're pricing in an inflation rate of about 2%. And even further out than one year, like 2.5%. And I just think that makes TIPS attractive because I just don't think inflation's going to come that low or stay that low at 2%.

I think the market is starting to realize that, thanks to the missteps that Kevin Warsh did yesterday, that the chance of hikes coming sooner is becoming a widely held view. There was one firm that said there would be no hikes this year and in fact none in the first quarter of next year and now they're saying it's going to be in December. And when I was on CNBC at the June press conference I said I don't think they're going to hike June or July or September. They didn't hike obviously yesterday, but I really think September should be a high probability for a hike. I don't know what the odds are at this moment but I think it'll be rising over time. Yesterday afternoon it was about 60% or so.

Yeah. Nowadays it seems like with Powell it seemed like it dropped down to about 50, but if you're at 60, if you head to 70, it's almost assuredly they'll hike. And that's the one way for Warsh to get the stain off of his reputation.

I mean, just say okay. But I've been saying that what bothers me about this Warsh situation is he uses a lot of words to say almost nothing and he doesn't have a plan. It seems to me his plan is to make a plan. He's planning on making a plan. And I'm extremely negative on this task force thing. It sounds like a company that's in trouble that's hiring a consultant to figure it out for him. And I've always thought that the Fed should really, I think the Fed chair should make the decision. I don't think it should be a vote by committee. Committees have a very hard time coming to a decision. Somebody has to be responsible for that decision. I know, and we have committee meetings. It's, you have differing opinions. Somebody's bullish, somebody's bearish, and it's very difficult to resolve unless you have one person that's the decision maker. And that's why I think investment firms need to have a CIO, someone that says, someone's going to make the call, I own this decision. And now instead of moving towards more centralized decision-making, we're going the other way. So now we're five subcommittees. And the people on the subcommittees, I guess they call them task forces, they don't, I suppose they're knowledgeable and smart and all that, but they're all kind of in these high-tech industries. And so I just think they should have a farmer on one of the subcommittee about food prices. Maybe you should have a farmer on there.

You know, maybe you should have some regular people. Maybe you should have a carpenter who's on one of these committees rather than, you know, the Fed has, part of the global financial crisis, they had 700 PhD economists. Danielle DiMartino Booth tells me it's over 800 now. And they didn't see the financial crisis coming. Now it's 800. I don't think that's going to solve their problem. Sharpen up the pencil. And so I think there's just too much bureaucracy at the whole thing. But you know, we just have to deal with the hand that we're dealt and rates going higher on the short end, I think, is pretty likely. But so far in the last 24 hours, it's the long end that's gone up a lot. The 30-year Treasury bond was the highest rate in '07, I think, was 5.18 or something like that. And now we're at 5.21. So we got a new high on the 30-year. And I wouldn't be surprised at all if the 30-year went to the mid-5s before the next meeting. And that sounded like a bold statement when I said it yesterday on TV, not knowing that it had this huge drop while I was speaking. So now to say it's going in the mid-5 almost doesn't mean anything. I think it's what?

It's halfway there. Five and a quarter, 5.30, something like that. So that's not really saying much, but that's going to keep going. And I've noticed that what had been a really good trade for us was avoiding the 30-year and even shorting it in some cases and focusing on the short end of the curve. And that wasn't good for the last three months or so. But all of a sudden, it's completely reversed again. And all the whatever losses were in that trade has been recouped in basically two days. And so I think we're in a new leg of that trade. I wouldn't be surprised at all. In fact, I believe 2s30s will go to 150, which is the long-term average. It's not an extreme number. It's 150. And with all the problems coming, with all this issuance coming from AI and the incredible deficit spending and all of that, it's fairly clear to me that the long bond needs to go higher. And so we've been convicted on that trade for a couple of years. And I don't see any reason to change that now. So it's up in quality, it's away from longing the yield curve. And it's a very sort of pleasant place to be because you're not being paid for taking risks. A little bit more these days than maybe say two months ago, but still, I mean, you've got IG spreads are inside of 80. They might have hit 80 yesterday. Junk bond spreads are pretty tight. They've been tighter at various points in time. But the good thing about the high-yield bond market, I'm just talking about the regular high-yield bond market, is the issuance has been much better than it was pre-private credit. Pre the private credit boom. A lot of lending that was marginal went into the high-yield bond market as a triple-C or a weak single-B or something like that. And a lot of these have just gone into the private credit.

Bank loans, too. And so it's strange because I keep thinking that high-yield bonds, even at the spreads they're at today, which are historically on the narrow side, I think they're justified. And I'm kind of known for being a skeptic of lower-quality credit, kind of calling for eight drawdowns for every two that happen. But at this point I'm more optimistic about the junk bond market, the public junk bond market, because it's a way of getting yield and a way of avoiding something that could really blow up in your face like the private credit market, where, you know, I famously talk about this fund that at year-end was marked at 100 and by I think it was April was down at 77 and that's pretty remarkable. A 23% drop in something that's sold as low volatility. Now, that drop didn't happen overnight, even though it was reported overnight. Obviously it accumulated over time and they got to the point where they just said, we can't keep, we've run out of fingers to put holes to fill up the holes in the dyke on this thing. We're just going to have to bite the bullet and do it. But you know, there was a day when there was some stock, I think it was Google, it dropped 20% because they went to a negative free cash flow position and that's not a real shock to people, it's a single name, they had a huge event going from largely cash flow positive to cash flow negative, but when we talk about a private credit fund, we're not talking about a single asset or a single company, we're talking about a portfolio of hundreds if not thousands of loans across a number of industries. In fact they pride themselves on their so-called diversification. I think they're actually gilding the lily a little bit on how much diversification there is. You know, no one wanted to report software, at least they didn't a few months ago because they thought the replacement by AI could be a threat. But software is their largest position in private credit. So, but going down 23 points, you might think, well, they marked every loan down 23 points. Well, that would be almost criminal that you had hundreds of loans and they were all overpriced by 23 points. But if it's only half the loans that they marked down, that means they went down 46 points.

And I keep hearing everything's great in private credit. That's what they say.

There's no stresses at all. It's just bad publicity. Well, if that's the case, then at least 75% of your loans should be rock solid and worth their issue price. That would mean the other 25% are worth eight. Eight down 92 points. So there's no way to, it's just, it must be horrible to be an explainer for that fund because one of these things must be true. It's just simple arithmetic. And what's really interesting is if they have to mark it down another few points, it would mean that 25% of the loans are worth zero or less. Well, it can't be worth less than zero. So you start to have to think about how many loans are actually worth zero.

And so this is an area that I've been warning about really for a year. And I didn't even know about these interval funds 18 months ago. I was just giving speeches in Dallas and some in New York City and some people kept coming up to me and asking about private credit and I said I wouldn't be in it. And they said well we're in this one fund and it was a good name sponsor. It's a household name. And I said, well, at least you're with a household name. I mean, it might give you some comfort. And he said, well, we can get out at the end of the quarter. And it was clear that he thought he could get all of his money out at the end of the quarter. And I said, well, I'll tell you what. If, and this was on the day of the tariffs, the so-called Liberation Day, April 2nd, when the markets were in disarray.

And I just said, look, if you get your next valuation report and they say it's down something like 2% or 4%, take as much out as you can possibly get because it's down a lot more than that. But I was unaware that there were these significant gating rates.

Yeah. 5% max. And now they're talking about maybe doing 7.5%. Some are even talking about doing 2% per month. And I think it was Apollo said they were going to give daily valuations. I mean why not just, I thought the whole point was you don't want it to be public credit. It's supposed to be an advantage. You don't have to do all this valuation stuff and that you can't have mass redemptions. But they seem to be morphing this into more of a public fund, which is kind of ironic. I thought this was supposed to be a superior mousetrap and better Sharpe ratio.

It was all born of 2022. You know, public markets, the long bond went down 50 points and the private credit miraculously wasn't marked down at all. Well, of course, it wasn't a 30-year loan. I know most of them aren't 30 years, but it's a 10-year loan. It obviously was down very substantially. Rates went up 500 basis points. So, yeah, I think there's a lot of issues there. And I'm almost certain that that's going to be part of the mix when we have a down cycle. And I think what most people aren't aware of is how the insurance companies are all involved in this. I think there's a lot of need-based investing that's going on. I always say that everyone knows that there's greed and there's fear and that fear ultimately is stronger than greed. But really the most dangerous thing, and it's almost unavoidable for institutions, is when you're investing based on need. You have an actuarial assumption. You have to make it. But there's no yield in the market that has that rate. We have a client who actually has an actuarial rate that's sensible. It's 6.5%. That's actually a sensible actuarial rate. In the old days, it'd be as high as nine, but rates were higher then.

Yeah. So at 6.5% they'll just be perpetually underfunded. So instead they have to solve for how can I ultimately get to the funded level and then I just have to earn 6.5%. So they're looking for things that yield 9.5%. Well, there aren't a lot of 9.5s around and safe, and that puts you into private credit.